HCM 400 Module 5 Budgeting Short Paper Example

Why the Clinic Missed Its Budget: Flexible Budget Variance Analysis at Pine Hollow

[Student Name]

Southern New Hampshire University

HCM 400: Healthcare Finance

Module Five Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Why the Clinic Missed Its Budget: Flexible Budget Variance Analysis at Pine Hollow

Pine Hollow Memorial Hospital's rural health clinic ended the first quarter $97,000 worse than budgeted. The clinic manager was asked to explain why. Setting actual totals beside budgeted ones reveals how far off the clinic was, yet says nothing about why. This paper explains how the budget was built and uses flexible budget variance analysis to separate the reasons for the shortfall.

How the Budget Was Built

The clinic's budget starts with volume: 21,000 visits for the year, or 5,250 a quarter, based on last year's visits plus a new part-time provider. Revenue is volume times expected payment per visit, $142, reflecting the clinic's payer mix. Labor is budgeted at 1.4 staff hours per visit at an average of $38 an hour, and supplies at $9 per visit. Fixed costs such as rent and equipment are budgeted separately and were on target.

What Happened

The clinic saw 4,900 visits, 350 fewer than budgeted, because the new provider started five weeks late and a flu wave was milder than expected. Average payment per visit was $140, slightly lower because more visits were self-pay. Staff worked 7,250 hours at an average of $41 an hour, higher than budgeted because a temporary provider covered the vacancy. Supplies cost $46,550.

Fixed and Variable Costs

Flexible budgeting depends on knowing which costs change with volume. Variable costs, such as supplies and some staff hours, rise and fall with visits. Fixed costs, such as rent, equipment leases and the clinic manager's salary, stay the same whether the clinic sees 4,900 or 5,250 patients in a quarter. Some costs are step-fixed: a medical assistant position is added only when volume crosses a threshold. The clinic's budget treats provider and support staff hours as variable within a range, because schedules are adjusted weekly, while treating rent, equipment and management as fixed.

The Cost of Lost Volume

The volume shortfall matters beyond the revenue variance. Because fixed costs do not fall when visits fall, each lost visit reduces the clinic's margin by more than its variable cost. With payment of $142 a visit and variable costs of about $62, each of the 350 missed visits cost roughly $80 in contribution toward fixed costs, or about $28,000 for the quarter. That figure helps the manager justify spending on faster provider onboarding and outreach, since recovering even half the lost visits would pay for both.

Why a Static Comparison Misleads

Comparing actual results with the original, or static, budget mixes two different questions: did the clinic see as many patients as planned, and did it manage costs well for the patients it did see? Finkler (1985) showed how a flexible budget separates those questions by recalculating what costs and revenue should have been at the actual volume. Differences between the static and flexible budgets reflect volume; differences between the flexible budget and actual results reflect price, wage rates and efficiency.

Revenue Variances

Budgeted revenue was 5,250 visits times $142, or $745,500. Actual revenue was 4,900 times $140, or $686,000, a shortfall of $59,500. The volume variance is the change in visits times budgeted payment: 350 fewer visits times $142, or $49,700 unfavorable. The price variance is the change in payment per visit times actual visits: $2 times 4,900, or $9,800 unfavorable. Most of the revenue gap came from fewer visits, not lower payment.

Labor Variances

At actual volume, the flexible budget for labor is 4,900 visits times 1.4 hours times $38, or $260,680. Actual labor cost was 7,250 hours times $41, or $297,250, which is $36,570 over the flexible budget. The wage rate variance is the $3 difference in hourly cost times actual hours: $21,750 unfavorable. For efficiency, compare the hours actually worked with the 6,860 hours that 4,900 visits should have required, 390 hours, times the budgeted $38 rate: $14,820 unfavorable.

Supply Variance

The flexible supply budget is 4,900 visits times $9, or $44,100. Actual supplies cost $46,550, a $2,450 unfavorable spending variance, mostly from a price increase on vaccines.

Summary of Variances

The table summarizes the variances. Volume explains the largest single piece, and the temporary provider's higher cost and extra hours explain most of the cost overrun.

Table 1. Rural Health Clinic Variances, First Quarter

Note. Composite figures; negative signs mark unfavorable variances.

Reading the Efficiency Variance

Finkler (1991) cautioned that efficiency variances in health care should be interpreted in light of patient acuity, since sicker patients legitimately require more staff time. The clinic's visit mix did shift slightly toward chronic disease follow-ups, which take longer, but staff interviews showed most of the extra hours came from the temporary provider's slower pace in an unfamiliar record system and from medical assistants staying late when the schedule ran behind.

Causes and Responses

Each variance points to a different response. The volume shortfall calls for faster onboarding of new providers and outreach to patients overdue for chronic disease visits. The wage rate variance reflects the cost of temporary coverage, which a recruitment plan and a shared float provider with the hospital could reduce. The efficiency variance suggests record system training for temporary staff and better scheduling templates. The price variance may improve as the clinic's financial counselor helps self-pay patients enroll in coverage.

Evidence From Other Small Hospitals

Holmes and Pink (2012) asked leaders of small rural hospitals which financial fixes they had tried, and common answers included changing staffing and scheduling practices, improving billing and expanding outpatient services, and that leaders viewed several of these as effective. The clinic's variances point to exactly these areas.

Using the Budget Going Forward

The clinic will report flexible budget variances monthly rather than quarterly, so problems are caught early. The manager will explain any variance larger than 5% with a cause and response. Budgets for next year will include a realistic ramp-up period for new providers.

Conclusion

A flexible budget turned a single $97,000 shortfall into specific, explainable variances: fewer visits, slightly lower payment, higher wage rates and extra hours. Each has a clear cause and response, which is far more useful to managers than a total that is simply over or under.

References

Finkler, S. A. (1985). Flexible budget variance analysis extended to patient acuity and DRGs. Health Care Management Review, 10(4), 21-34. https://doi.org/10.1097/00004010-198501040-00004

Finkler, S. A. (1991). Variance analysis. Journal of Nursing Administration, 21(7), 19-25. https://doi.org/10.1097/00005110-199107000-00006

Holmes, G. M., & Pink, G. H. (2012). Adoption and perceived effectiveness of financial improvement strategies in critical access hospitals. The Journal of Rural Health, 28(1), 92-100. https://doi.org/10.1111/j.1748-0361.2011.00368.x